A significant increase in voluntary liquidations has sparked concerns over potential misuse, with insolvency experts calling for stricter regulation.
Company Voluntary Liquidations (CVLs), where shareholders decide to wind up a business due to insolvency, have reached record levels, making them the most prevalent form of corporate insolvency in the UK. Data obtained through a Freedom of Information request highlighted this trend, revealing a dramatic surge in the ratio of CVLs to compulsory liquidations. Historically, this ratio stood at roughly 2:1 before 2012, but it increased to a staggering 25:1 by 2021. Last year alone, one in every 272 UK businesses opted for voluntary liquidation, prompting calls for more stringent regulations.
Stephen Hunt, a partner at the insolvency firm Griffins, partly attributed this rise to reduced costs driven by technological advancements. However, he issued a warning about the potential for misuse. ‘CVLs are often sold by unqualified salespeople to unsophisticated clients seeking cheap liquidation,’ he said. Hunt further noted that the higher cost of compulsory liquidation, which is managed by the Official Receiver, has contributed to the increase in CVLs. The latter is perceived as a more cost-effective option.
Fixed fees introduced in 2016 have rendered many insolvencies financially unviable for practitioners to investigate, raising concerns that significant tax and creditor debts are being written off without proper examination. Hunt urged the government to reintroduce percentage-based fees to ensure better scrutiny of liquidation cases.
Nicky Fisher, past president of R3, the UK’s insolvency trade body, highlighted another concern: the increasing cost of winding up a company via the courts. Creditors often hesitate to commit funds when the recovery prospects are slim. Therefore, CVLs, being both faster and cheaper for shareholders, have become the preferred option, especially in the challenging post-pandemic trading conditions.
The surge in voluntary liquidations underscores the urgent need for regulatory reforms to prevent potential misuse. Experts advocate for the reintroduction of percentage-based fees to ensure thorough examination and accountability in the liquidation process.